Question

Assume the economy is self-regulating and currently is in long-run equilibrium with the price level equal to P5. If something happens that shifts the AD curve to the AD1 position, the economy will eventually settle down at a long-run equilibrium point of __________.

Answer 1

Answer:

The correct answer is P3, Q3.

Explanation:

Once the market has reached its equilibrium, one may ask: what happens if there is an increase in demand? First, this would shift the demand to D ’, raising prices because the offer (at least for now) is already determined. This price increase allows the generation of profits, in point 1. However, it forces the offer to the right (S ’), reaching a balance in E2, where our company produces the same initial amount.